Icahn's PayPal Spinoff Proposal Gains Some Traction

Many analysts were skeptical in late January when the veteran corporate raider revealed he had taken a nearly 1% stake in the payment and e-commerce giant and said he would press eBay (EBAY) to spin off its lucrative PayPal unit to unlock greater shareholder value.

Most observers said Icahn needed a much larger stake — at least 25%, noted Susquehanna Financial Group — and deep shareholder support to force a showdown with eBay directors, who have rejected his proposal and continued their 2-year-old restructuring and international expansion efforts.

EBay, based in San Jose, Calif. (above), has worried some investors by lowering its 2015 revenue outlook. View Enlarged Image

The eBay gambit adds to the portfolio of Icahn, who moved similarly with Apple (AAPL), Netflix (NFLX), Yahoo (YHOO) and other companies in pursuit of his activist agenda.

A report last week by Bernstein Research found many shareholders aren't happy with eBay's directors — adding grist to Icahn's call for a boardroom shuffle.

The report by Bernstein analyst Carlos Kirjner says 55% of investors feel the composition of eBay's board should change, though only 42% favor spinning off PayPal and fewer than 30% favor giving Icahn a board seat. Bernstein polled 178 investors, nearly half of whom were eBay shareholders. About two-thirds were long on the company, and one-third were composed of hedge funds.

Kirjner declined further comment beyond the report. But some other analysts are also lending more credence to Icahn's spinoff proposal. "We think there's merit to possibly separating (eBay from PayPal)," S&P Capital IQ equity analyst Scott Kessler told IBD, noting that eBay could preserve its "synergies" with PayPal even if it becomes a separate company.

EBay's Alibaba?

Robert Wagner, who bills himself as an independent analyst, noted in a report on the Seeking Alpha website last week titled "PayPal Could Be EBay's Alibaba" the similarity to how Yahoo's value is underpinned by its 24% holding in China e-commerce leader Alibaba, which could launch a U.S. IPO this year.

Wagner says a PayPal spinoff would make the payment king a better platform for strategic acquisitions — especially in mobile payments. He also speculates that an independent PayPal would develop a virtual payment currency tailored to merchant needs that would differ from Bitcoin, a digital currency that's a favorite of speculators.

"I imagine PayPal could (develop a digital currency product), but given that they haven't, I assume eBay either hasn't thought of it or isn't interested. An independent PayPal would likely be forced to address the virtual currency issue," Wagner wrote.

Carl Icahn has hit a nerve with some eBay shareholders.

Many analysts were skeptical in late January when the veteran corporate raider revealed he had taken a nearly 1% stake in the payment and e-commerce giant and said he would press eBay (EBAY) to spin off its lucrative PayPal unit to unlock greater shareholder value.

Most observers said Icahn needed a much larger stake — at least 25%, noted Susquehanna Financial Group — and deep shareholder support to force a showdown with eBay directors, who have rejected his proposal and continued their 2-year-old restructuring and international expansion efforts.

EBay, based in San Jose, Calif. (above), has worried some investors by lowering its 2015 revenue outlook. View Enlarged Image

The eBay gambit adds to the portfolio of Icahn, who moved similarly with Apple (AAPL), Netflix (NFLX), Yahoo (YHOO) and other companies in pursuit of his activist agenda.

A report last week by Bernstein Research found many shareholders aren't happy with eBay's directors — adding grist to Icahn's call for a boardroom shuffle.

The report by Bernstein analyst Carlos Kirjner says 55% of investors feel the composition of eBay's board should change, though only 42% favor spinning off PayPal and fewer than 30% favor giving Icahn a board seat. Bernstein polled 178 investors, nearly half of whom were eBay shareholders. About two-thirds were long on the company, and one-third were composed of hedge funds.

Kirjner declined further comment beyond the report. But some other analysts are also lending more credence to Icahn's spinoff proposal. "We think there's merit to possibly separating (eBay from PayPal)," S&P Capital IQ equity analyst Scott Kessler told IBD, noting that eBay could preserve its "synergies" with PayPal even if it becomes a separate company.

EBay's Alibaba?

Robert Wagner, who bills himself as an independent analyst, noted in a report on the Seeking Alpha website last week titled "PayPal Could Be EBay's Alibaba" the similarity to how Yahoo's value is underpinned by its 24% holding in China e-commerce leader Alibaba, which could launch a U.S. IPO this year.

Wagner says a PayPal spinoff would make the payment king a better platform for strategic acquisitions — especially in mobile payments. He also speculates that an independent PayPal would develop a virtual payment currency tailored to merchant needs that would differ from Bitcoin, a digital currency that's a favorite of speculators.

"I imagine PayPal could (develop a digital currency product), but given that they haven't, I assume eBay either hasn't thought of it or isn't interested. An independent PayPal would likely be forced to address the virtual currency issue," Wagner wrote.

In any case, Icahn continues to gain more credibility with analysts, two months after eBay CEO John Donahoe rebuffed Icahn's spinoff notion as an "old idea."

Most industry observers agree with Donahoe, but some have started to side with Icahn. Omega Advisors honcho Leon Cooperman told CNBC on Monday that he backs Icahn's call for a PayPal spinoff. Cooperman's hedge fund owned a less than 0.1% stake in eBay as of Dec. 31.

EBay stock is up 6.5% since Icahn's stake was disclosed late Jan. 22, showing Icahn has triggered investor interest.

EBay has been underperforming in long-term revenue and other targets laid out by the company at a pivotal analyst day event in March 2013. Donahoe said then that eBay expected sales of $21.5 billion to $23.5 billion in 2015.

But in January, when the company released Q4 earnings, it lowered its 2015 revenue outlook to $20.5 billion to $21.5 billion.

PayPal also might be lagging the company's forecast. At that March 2013 meeting, PayPal President David Marcus predicted his firm's total payment volume would double from $145 billion at the end of 2012 to roughly $290 billion at the end of 2015. PayPal reported $180 billion in TPV for 2013, so it has to pick up its pace to hit its target.

"A lot of the optimism around (eBay) stock was about what they could do about PayPal, and this has clearly fallen short of expectations," ITG analyst Steve Weinstein told IBD.

EBay's board has shown its unhappiness. Its executive compensation committee cut Donahoe's 2013 compensation by 53%. The committee "concluded that while Mr. Donahoe continued to perform well against many ... goals, the (company's) financial performance for 2013 and positioning relative to its competitors at the start of 2014 did not fully meet expectations," it said in a proxy statement filed Monday.

S&P's Kessler says eBay could gain from a PayPal spinoff. It could keep a majority stake in PayPal, helping its own valuation while using its PayPal shares to help fund new acquisitions. "PayPal stock would command a high valuation that (would provide leverage) for acquisitions" by eBay, he said.

EBay points out that removing PayPal would interfere with how the payment unit generates growth for its marketplaces unit, and vice versa. Executives underscore the benefits of eBay and PayPal sharing business information, fraud detection technology and marketing resources. But Kessler says there are ways to preserve these synergies even with a PayPal spinoff.

Kessler notes that he broached the idea of a PayPal spinoff as far back as when he made his predictions for 2011.

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